Sanjay Saxena Managing Director

1. Challenges in Empowering Underserviced Groups in Accessing Finance Sanjay Saxena Managing Director

2. Background • - Access to Finance is a key constraint for MSMEs. - Correlation between Financial Access & Depth, Poverty & Inequality -Lack of access to finance impacts smaller firms (-10%) more then larger ones (-6%). • - It is important to distinguish ‘Access’ from ‘Use’ but its not easy to measure the two independently. • - Bank finance is the biggest source of Finance, but it does not mean non-bank finance is less important. Access To Finance

3. Background • Preference of bankers for Collateral rather than ‘Cash Flow’ based lending • - Less than 25% of small firms use external finance as opposed Bigger Firms have better access to Finance • Serving the MSME involves higher transaction costs • Lenders give preference to ‘Priority Sectors’ • Key role of efficient Financial Intermediaries Access To Finance

4. Empowering Underserviced Groups in Accessing Finance involves Understanding the : Enforcement Context Social Context Market Context Economic Context Political Context Regulatory Context Access To Finance

5. Empowering Underserviced Groups in Accessing Finance involves Understanding the : • Trust Deficit • (Trust in Banking, MFIs, Cooperatives, Government, etc.) Enforcement Context Social Context Market Context Economic Context Political Context Regulatory Context Cultural / Religious Issues (ShariaLaws, Islamic Banking, Lack of Banking habits and Credit culture, Cultural bias towards some activities etc.) - Reason for Taking Loans (Consumption Expenditure, Investment) Law and Order Situation (Organized crime, Threat of Violence, Enforcement) Absorptive Capacity (MSME have Weak Documentation skills, Lack of awareness of available schemes, or Financial products) Access To Finance

6. Empowering Underserviced Groups in Accessing Finance involves Understanding the : • Distance • (Spread, Communication challenge, High transaction costs etc.) Enforcement Context Economic Context Social Context Market Context Political Context Regulatory Context -Existence of Capital Markets (Debt and Equity Market option, etc.) • Loan Guarantees, Banking competition, CIB & CAR Size of the Market and Talent Pool • Sectoral Issues • (Typical requirements of each industry, sector, seasonality etc.) Incentives within Financial Organizations Access To Finance

7. Empowering Underserviced Groups in Accessing Finance involves Understanding the : • -Exchange Rate controls & Volatility, De/Regulated Interest Rates and Inflation Enforcement Context Social Context Market Context Economic Context Political Context Regulatory Context - Inefficiency Gap, Insufficiency Gap and Feasibility gap Availability of Micro-Financing, Capital Markets, Informal Lenders Investor Rights protection, E-Commerce Laws, Taxation • Macroeconomic stability and Potential for Regional Cooperation • (Regional stock exchanges, Cross border trade, etc.) -Import / Export potential Access To Finance

8. Empowering Underserviced Groups in Accessing Finance involves Understanding the : • Incentives for Politicians • (Does good economics makes good politics?) Enforcement Context Social Context Market Context Economic Context Political Context Regulatory Context • Polarization • (Existence of completely divergent viewpoints) • Access to Information • Strength of Democratic Institutions • Need for ‘Selling’ reforms Access To Finance

9. Empowering Underserviced Groups in Accessing Finance involves Understanding the : • - Institutional Capacity for Regulatory & Judicial Supervision • (Functioning of Judiciary and Legal System, Statutory functions, Mandate, Powers, etc.) Enforcement Context Social Context Market Context Economic Context Political Context Regulatory Context - Laws and legal framework (Consumer Protection Laws, Banking Laws, Insurance Laws, CIB / CAR Laws , Bankruptcy Laws etc. ) Adverse selection / Moral hazard / Sovereign Risk • Need to monitor the Borrower Knowledge and Skills (Competent Regulators, Judges) Access To Finance

10. Empowering Underserviced Groups in Accessing Finance involves Understanding the : • Titles to Business and Land, Labor Regulation Enforcement Context Social Context Market Context Economic Context Political Context Regulatory Context - Judicial Enforcement Mechanisms (Civil Procedure Court, Consumer Court, etc.) Systems (Case Management System, Criminal database, Judgment Debt database) Qualified and Competent Judges (Intellectual property Taxation, Banking, Insurance, Company liquidation) Access To Finance

11. Corruption • About 42% SMEs in middle-income countries and 34% in low-income countries perceive corruption to be a major obstacle. • Corruption contributes to inequality. • Corruption is negatively correlated with the income level. • Corruption is negatively correlated with growth. • Corruption erodes trust in banking and financial system. • Raises cost of capital. • Increases the impact of risks. • Discretionary powers given to government officials tends to prove counter productive to fight corruption. • Powerful supervisory agencies are prone to capture and manipulation by politicians, regulators, or both and hence, tend to lower the integrity of bank lending. • Private Monitoring works better for maintaining the integrity of bank lending in countries with sound legal and bureaucratic institutions.

12. Thank You S 85 Greater Kailash II, New Delhi 110048, INDIA Tele : +91-11- 29219397 / 41435754 Mobile : +91-9811083474 Email : ss@tscpl.com Home : www.tscpl.info Access To Finance